Commodity Money

View FREE Lessons!

Definition of Commodity Money:

Commodity money is a commodity that has intrinsic value and is used as a median of exchange.  

Detailed Explanation:

Economies relying on bartering usually evolve to identify something that can be used as a median of exchange. Normally it is a commodity which has sufficient demand that traders know that even if they do not have a use for the commodity, they can easily trade it for something useful. How do we know when a commodity has become money? It has become money if people accept that commodity as a medium of exchange even if they don’t plan to use it themselves. Commodity money is a commodity that has intrinsic value and is used as a median of exchange. Tobacco, gold, and silver are examples of commodity money. Gold is commonly used in jewelry, but even people who are not jewelers own gold because they know it is easily sold. 

 

Dig Deeper With These Free Lessons:

What is Money
Fractional Reserve Banking and the Creation of Money
Monetary Policy – The Power of an Interest Rate